Question 1

The European call option gives the option buyer the right to exercise the option:
A) at any time up to the expiration date.
B) only on the expiration date.
C) if the price of the underlying asset falls below the exercise price.
D) immediately after the payment of dividends.

Accepted Answer

The European call option can only be exercised on the expiration date, not before or after.

Question 2

For a call option,the:
A) buyer is locked into receive the underlying asset at a specified time.
B) writer is committed to handing over the specified asset if the holder of the call exercises the option.
C) writer may choose whether or not to deliver the underlying asset at a specified time.
D) buyer will choose to exercise the option only if the price of the underlying asset falls.

Accepted Answer

The writer (or seller) of a call option is obligated to sell the underlying asset to the buyer at the strike price if the buyer decides to exercise the option. This means the writer must deliver the asset if called upon to do so.

Question 3

An option that gives the option buyer the right to sell the commodity or financial instrument specified in the contact at the exercise price is called:
A) an American option.
B) a European option.
C) a call option.
D) a put option.

Accepted Answer

A put option gives the option buyer the right to sell the commodity or financial instrument specified in the contract at the exercise price. An American or European option refers to the timing of exercise, while a call option gives the option buyer the right to buy the underlying asset at the exercise price.

Question 4

In a put option,the:
A) writer is locked into handing over the underlying asset at a specified time.
B) buyer has the option to sell the specified asset at a specified time.
C) buyer is locked into receiving the underlying asset at a specified time.
D) seller must hand over the specified asset at a specified time.

Accepted Answer

In a put option, the buyer has the option to sell the specified asset at a specified time. The writer, or seller, is obligated to buy the asset at the specified price if the buyer decides to exercise their option to sell.

Question 5

When a company contacts a bank and asks for a 3-month forward rate and is quoted by the bank's FX dealer AUD/USD0.9560-65 14.20,then the three month forward rate is:
A) AUD/USD0.9536-45
B) AUD/USD0.9540-51
C) AUD/USD0.9574-85
D) AUD/USD0.9580-79

Accepted Answer

The three month forward rate is calculated by adding the forward points to the spot rate. In this case, the spot rate is AUD/USD 0.9560-65, and the forward points are 14.20. To get the forward rate, we add the forward points to the bid price (0.9560), giving us AUD/USD 0.9574. Therefore, the answer is C, AUD/USD 0.9574-85.

Question 6

In the futures markets,a maintenance margin call refers to:
A) funds paid to the clearing house by the brokers as insurance against losses.
B) funds paid to the clearing house by each trader to cover losses.
C) realised profits paid by the clearing house to traders.
D) the difference between the futures contracts price and the underlying asset.

Accepted Answer

A maintenance margin call refers to additional funds that a trader must deposit into their futures account to meet the minimum margin requirements set by the exchange. This is done to cover potential losses that may occur due to adverse price movements in the futures position. The funds are paid by each trader to the clearing house, not the brokers, and are used to cover losses. Therefore, option B is the correct answer. Options A, C and D do not accurately describe a maintenance margin call.

Question 7

If a company intends to borrow in three months' time,it can lock in its borrowing costs by:
A) buying futures contracts.
B) selling futures contracts.
C) going long on futures contracts.
D) an arbitrage position on futures contracts.

Accepted Answer

The answer of If a company intends to borrow in...

Question 8

An option buyer:
A) has a greater insurance benefit than the purchaser of a futures contract.
B) will generally incur a lower cost compared to a purchaser of a futures contract.
C) is purchasing a very risky instrument if they don't own the underlying asset as they are locked in to buying at expiration.
D) carries the risk of unfavourable price movements.

Accepted Answer

Option buyers have the right, but not the obligation, to buy or sell an asset at a predetermined price, providing a form of insurance against price movements. Unlike futures contracts, where the buyer is obligated to buy or sell the asset, options offer more flexibility and protection.

Question 9

In the futures markets,if a futures contract is marked-to-market,this refers to the:
A) interaction of the demand and supply forces in the market to determine the price of the options contract.
B) interaction of the demand and supply forces in the market to determine the price of the futures contract.
C) settlement of gains and losses on futures contracts on a daily basis.
D) settlement of gains and losses on forward contracts on a daily basis.

Accepted Answer

When a futures contract is marked-to-market, the gains and losses on the contract are settled on a daily basis. This means that any profits or losses that have accumulated over the course of the day are settled at the end of the trading day, rather than waiting until the expiration of the contract. This process is also known as daily settlement. Therefore, option A, option B, and option D are incorrect.

Question 10

In the futures markets,the price of a derivative contract for gold is based on:
A) prices of gold mining companies.
B) price of gold in the spot markets.
C) price of gold in the forward markets.
D) price of gold commodity indexes.

Accepted Answer

The price of a derivative contract for gold in the futures markets is based on the price of gold in the spot markets, which is the current market price of physical gold. This is because futures contracts allow traders to buy or sell gold at a future date at a predetermined price, and the price of the futures contract reflects the expected price of gold at that future date. The other options (A, C, and D) are not directly related to the price of gold in the spot markets and therefore do not impact the price of a gold futures contract.

Question 11

A company,worried that the cost of funds might rise during the term of their short-term borrowing,can hedge this rise by:
A) buying futures contracts on bank-accepted bills.
B) selling futures contracts on bank-accepted bills.
C) buying bank-accepted bills on the spot market.
D) increasing the amount of money that has been borrowed.

Accepted Answer

Selling futures contracts on bank-accepted bills is a way to hedge against an increase in the cost of funds. If the cost of funds does rise, the value of the futures contracts will also rise, offsetting the increased cost. Buying futures contracts or bank-accepted bills on the spot market do not offer the same hedging benefits. Increasing the amount of money borrowed does not protect against rising costs but rather would increase the exposure to them.

Question 12

The advantage of using a forward rate agreement FRA over a futures contract is:
A) FRAs are highly standardised.
B) FRAs have only an initial margin and no ongoing maintenance margin.
C) the terms and conditions of a FRA can be negotiated.
D) FRAs have standardised maturities.

Accepted Answer

The advantage of using a FRA over a futures contract is that the terms and conditions of a FRA can be negotiated. This means that the parties involved can tailor the agreement to their specific needs, whereas futures contracts are more standardised with less room for negotiation.

Question 13

An option that gives the option buyer the right to buy the commodity or financial instrument specified in the contact at the exercise price is called:
A) an American option.
B) a European option.
C) a call option.
D) a put option.

Accepted Answer

A call option gives the option buyer the right to buy the underlying asset at the pre-determined exercise price. This is a bullish option as the buyer profits from the underlying asset price going up. An American option can be exercised at any time before the expiration date, while a European option can only be exercised at the expiration date. A put option gives the option buyer the right to sell the underlying asset at the pre-determined exercise price.

Question 14

A forward rate agreement (FRA)is an interest rate risk-management product,generally provided by banks over the-counter.Which of the following statements regarding forward rate agreements is correct?
A) FRAs are not standardised with regard to contract period and amount.
B) The centralised clearing house (CCH) holds the deposits and margin calls.
C) As a bank is the counterparty to the FRA, there is no credit risk.
D) All of the given answers.

Accepted Answer

FRAs are not standardised with regard to contract period and amount, as they are typically customised to meet the specific needs of the parties involved. The other statements are incorrect. The centralised clearing house does not hold deposits and margin calls in relation to FRAs and there is counterparty credit risk involved when dealing with banks.

Question 15

Which of the following statements relating to the use of futures contracts is incorrect?
A) Futures contracts are derivative products that derive from a physical market product.
B) The pricing of futures contracts is based on the price of the underlying market product.
C) Future physical market price changes are offset by a profit or loss in the futures market.
D) Futures contracts are generally closed out by delivery of the physical market product.

Accepted Answer

Futures contracts are primarily used for hedging against future price movements of the underlying market product. However, they are typically closed out by cash settlement rather than delivery of the physical market product. Only a small proportion of futures contracts result in physical delivery.

Question 16

In the futures markets,when the initial margin of a futures account is topped up daily to cover adverse futures price movements,this is called:
A) marked-to-market.
B) maintenance margin call.
C) short call.
D) closing-out.

Accepted Answer

The answer of In the futures markets,when the initial margin...

Question 17

The market ASX Trade 24 trades in:
A) shares 24 hours.
B) shares and bonds 24 hours.
C) futures contracts.
D) forward contracts.

Accepted Answer

The answer of The market ASX Trade 24 trades in:
A)...

Question 18

If an FRA dealer quotes '6Mv9M 7.25 to 20',this means that the dealer is prepared to:
A) lend three-month money at 7.05% per annum.
B) borrow three-month money at 7.05% per annum.
C) lend three-month money at 7.25% per annum.
D) borrow three-month money at 7.25% per annum.

Accepted Answer

The dealer is prepared to lend three-month money at 7.25% per annum.

Question 19

In the futures markets,the funds that represent 2 to 10 per cent of the futures contract that a client pays to the futures exchange clearing house are called:
A) maintenance margin.
B) initial collateral.
C) margin call.
D) initial margin.

Accepted Answer

The funds that represent 2 to 10 per cent of the futures contract that a client pays to the futures exchange clearing house are called initial margin. This initial margin is intended to provide a buffer against potential losses and is typically based on the volatility and liquidity of the underlying commodity or financial instrument being traded.

Question 20

The holder of an American call option has the right to:
A) buy the underlying asset at the exercise price on or before the expiration date.
B) buy the underlying asset only on the expiration date.
C) sell the underlying asset at the exercise price on or before the contract expiration date.
D) sell the underlying asset only at the expiration date.

Accepted Answer

The holder of an American call option has the right to buy the underlying asset at the exercise price on or before the expiration date. This means that the holder can choose to exercise the option and buy the asset anytime before the expiration date at the agreed-upon exercise price.

Quiz 18: An Introduction to Risk Management and Derivatives

The European call option gives the option buyer the right to exercise the option:

For a call option,the:

An option that gives the option buyer the right to sell the commodity or financial instrument specified in the contact at the exercise price is called:

In a put option,the:

When a company contacts a bank and asks for a 3-month forward rate and is quoted by the bank's FX dealer AUD/USD0.9560-65 14.20,then the three month forward rate is:

In the futures markets,a maintenance margin call refers to:

If a company intends to borrow in three months' time,it can lock in its borrowing costs by:

An option buyer:

In the futures markets,if a futures contract is marked-to-market,this refers to the:

In the futures markets,the price of a derivative contract for gold is based on:

A company,worried that the cost of funds might rise during the term of their short-term borrowing,can hedge this rise by:

The advantage of using a forward rate agreement FRA over a futures contract is:

An option that gives the option buyer the right to buy the commodity or financial instrument specified in the contact at the exercise price is called:

A forward rate agreement (FRA) is an interest rate risk-management product,generally provided by banks over the-counter.Which of the following statements regarding forward rate agreements is correct?

Which of the following statements relating to the use of futures contracts is incorrect?

In the futures markets,when the initial margin of a futures account is topped up daily to cover adverse futures price movements,this is called:

The market ASX Trade 24 trades in:

If an FRA dealer quotes '6Mv9M 7.25 to 20',this means that the dealer is prepared to:

In the futures markets,the funds that represent 2 to 10 per cent of the futures contract that a client pays to the futures exchange clearing house are called:

The holder of an American call option has the right to: